RST Limited is a family-controlled company which operates a chain of retail outlets specialising in motor spares and accessories.

Branch inventory is purchased by a centralised purchasing function in order to obtain the best terms from suppliers.

A 10% handling charge is applied by headquarters to the cost of the purchases, and branches are expected to add 25% to the resulting figure to arrive at normal selling prices, although branch managers are authorised to reduce normal prices in special situations. The effect of such reductions must be notified to headquarters.

On 1 April 2012, a new branch was established at Derham. The following details have been recorded for the year ended 31 March 2013:

£

Purchase cost to head office of inventory transferred to Derham 82,400 Derham branch sales: cash 89,940 credit 1,870 Inventory transferred from Derham to other branches, at normal selling prices 3,300 Authorised reductions from normal selling prices during the year 2,250 All records in respect of branch activities are maintained at head office, and the branch profit margin is dealt with through a branch inventory adjustment account.

Required:

(a) Prepare:

(i) the branch inventory account (maintained at branch selling prices);

(ii) the branch inventory adjustment account.

The book inventory should be taken for this part of the question.

(b) List four of the possible reasons for the inventory difference revealed when a physical stocktaking at the Derham branch on 31 March 2013 showed inventory valued at selling prices amounting to £14,850.

(c) State which of the following is the figure to be included in RST Limited’s statement of financial position at 31 March 2013, for Derham branch inventory:

(i) £11,138

(ii) £11,880

(iii) £10,800

(iv) None of these.

Justify your choice with appropriate calculations.